AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns a rating of 'AA-' to the following combination tax
and revenue refunding bonds (the bonds) of the city of Galveston, Texas
(the city):

--$11.2 million combination tax and revenue refunding bonds, series
2013A;

--$2.1 million combination tax and revenue refunding bonds, series 2013B.

The bonds are expected to price via negotiation the week of March 18,
pending market conditions. Proceeds will be used to refund for debt
service savings a portion of the city's outstanding COs, series 2004A
and series 2004B.

In addition, Fitch affirms the following ratings:

--$53.5 million general obligation (GO) debt (pre-refunding) at 'AA-';

The GOs and the city's COs are secured by an annual property tax levy,
limited to $.70 per $100 taxable assessed valuation (TAV). The series
2013A and 2013B bonds are additionally payable from surplus wharfage
revenues. The city's COs are additionally payable from the city's
surplus sanitation, water & sewer operations.

The HOT bonds are secured by a first lien on a portion of HOTs levied
within the city. The HOT bonds are additionally secured by a cash funded
debt service reserve fund. The HOTs securing the bonds represent 4% of
all hotel room rentals in the city.

KEY RATING DRIVERS

SOLID FINANCES: The city maintains a strong financial position, with
strong reserves and a return to surplus operations in fiscal 2012 after
two years of deficits related to the impact of Hurricane Ike in
September 2008.

TOURISM/MARITIME BASED ECONOMY: The city's economy is centered in
leisure, hospitality and port operations. Expanding health services and
top government and education sector employers help to stabilize the
local economy.

ECONOMIC RECOVERY CONTINUES: Galveston suffered severe flooding damage
during Hurricane Ike in 2008. Economic recovery continues at a solid
pace, driven primarily by various infrastructure projects and ongoing
development of the local tourism industry.

MANAGEABLE DEBT: The city's overall debt is moderate and its debt
service burden is low. Fitch anticipates overall debt to remain moderate
based on the lack of new debt issuance plans and a rapid amortization
rate. Retiree costs are also manageable.

SOUND COVERAGE/HOT VOLATILITY: The 'A' rating on the HOT bonds is based
on sound maximum annual debt service (MADS) coverage (over 2x). HOT
revenues are subject to economic sensitivity and high concentration
among top HOT contributors. However, HOT collections have demonstrated
solid growth since Hurricane Ike in 2008 and sound legal provisions
provide adequate bondholder protection.

RATING SENSITIVITIES

SOLID FINANCIAL PROFILE: The city's debt is sensitive to shifts in
fundamental credit characteristics including structural balance of the
city's operations and maintenance of adequate general fund reserves.

The rating on the HOT bonds incorporates the historical level of
volatility. Should actual HOT revenues exceed such volatility,
pressuring MADS coverage, there could be downward pressure on the rating.

CREDIT PROFILE

The city of Galveston is located on Galveston Island approximately 45
miles from Houston in southeast Texas. With a population of
approximately 48,000 the city is the county seat of Galveston County
(rated 'AA+' by Fitch, Stable Outlook).

UPPER TEXAS COAST COMMUNITY

The local economy is anchored by the Port of Galveston, healthcare, and
tourism. The University of Texas Medical Branch (UTMB) anchors the
city's health and education service sector, provides primary indigent
health care, and serves as a teaching hospital and hub for medical
research. UTMB is constructing a $438 million 13-story hospital to
replace a facility damaged by Hurricane Ike; the opening is projected
for 2016. UTMP employs 11,568 representing approximately 8% of the
county's total employment base and a likely higher proportion of the
city's base. The city's improved unemployment rate of 7.3% as of
December 2012 reflects new job growth, and compares favorably to an
average U.S. rate of 7.6% but continues to trail the average Texas rate
of 6% for the same period.

Oil & gas, petroleum and industrial tenants rely on the Port of
Galveston and nearby privately owned Pelican Island maritime and
transportation infrastructure for support and cargo transport services.
Infrastructure improvements are underway at both locations to support
growth in maritime activity anticipated with both expanded cruise
operations and the opening of the new locks in the Panama Canal in 2014.

IMPACT OF HURRICANE IKE WANING

Hurricane Ike hit the upper Texas coast in September 2008, resulting in
widespread flood damage across the island. The city's population and
tourism declined subsequent to the storm, but management reports that
90% of its hotel stock was undamaged due to its proximity to the seawall
which extends along the city's beachfront.

Public and private support has infused over $2 billion in disaster
recovery monies to the local economy since the storm on a variety of
projects. Evidence of the recovery is found in the city's 16%
post-hurricane tax base growth (taxable assessed value suffered a 14%
storm-related decline and upward adjustments are limited to 10%
annually), as well as sales tax growth averaging 5% over the past two
years.

SOUND FINANCIAL PROFILE

Facing reduced population, revenue streams and service requirements in
the wake of Hurricane Ike, management 'right-sized' operations through
staffing reductions and other efficiencies. This prudent fiscal
management and conservative budgeting enabled the city to complete
fiscal 2011 with an unrestricted general fund balance of $10.3 million,
representing 24.8% of expenditures and transfers out.

The city posted a net surplus of $6.3 million (15 % of spending and
transfers out) in fiscal 2012 (unaudited) on the strength of sales tax
revenue growth and continued cost control, aided by proceeds from the
sale of nonessential city-owned property. Year-end unrestricted reserves
of $16.4 million represent a solid 39.1% of spending and transfers out.

The city's overall debt level is moderate at 4.6% of market value and
amortization is rapid at 81% in 10 years. Management expects its capital
needs will be funded predominantly with grant monies and remaining bond
proceeds over the near term.

The city sponsors three single-employer defined benefit pension plans
for city employees, firefighters and police, and acts as a conduit for
the provision of retiree health care benefits (at the retiree's cost).
Pension funded rates are adequate for the city employee plan, but
underfunded for the police and firefighter plans (47.6% and 65.5%
respectively, based on Fitch's more conservative 7% investment rate
assumption. Fitch notes that the funding rates are premised on an
actuarial assumption for projected salary increases which exceeds those
currently in place and anticipated in the near term. The city's carrying
cost including annual debt service, pension and other post-employment
benefit contributions represent a low 7.6% of fiscal 2011 governmental
spending net of capital project fund expenditures.

RISING HOT COLLECTIONS, SOUND DEBT COVERAGE; CONCENTRATED TAXPAYERS

Fiscal 2012 HOT collections are a strong 17% above fiscal 2011
reflecting continued improvement in the tourism sector. HOT collections
have grown at a sound compound annual growth rate of 3.8% over the past
five years ending in fiscal 2012, with higher growth of 13.6% since
fiscal 2009.

Fiscal 2013 HOT debt service of $1.9 million is covered 2.8x by the most
recent 12 months of HOT collections through January 2013. Projected debt
service coverage of maximum annual debt service (MADS) ($2.3 million) is
healthy at 2.4x based on the most recent 12 months of HOT collections
through January 2013. The debt service coverage of MADS performs well
under a variety of Fitch stress test scenarios. Fitch notes MADS
coverage would remain at 1.0x assuming a decline in HOT revenue of 58%
or more than two times the actual revenue decline following Hurricane
Ike.

Legal provisions are satisfactory and include an additional bonds test
(ABT) of 1.5x MADS and a standard cash funded debt service reserve fund
requirement. Additional leveraging to the ABT requirement, though not
anticipated, would likely contribute to negative action on the rating.

HOT revenues are concentrated in the top hotel tax generators; the 10
largest account for 65% of pledged revenue in the city. While the top
HOT generator (Moody Garden Hotel) contributes 20% of pledged revenues,
the presence of its adjoining 140,000 foot convention center lends a
degree of stability to the current concentrated stock. Management
reports new hotels under construction and additional planned for the
near term. Fitch considers the strong coverage and broadening hotel base
as mitigating factors to current high concentration.

EXPANDING TOURISM AND HOSPITALITY

The city's burgeoning cruise business is the country's 6th largest,
estimated to bring more than 100,000 visitors a year to the island
through the Port of Galveston. The port serves as a home to the Carnival
Magic, Triumph, the Disney Magic, and most recently the Princess
Cruises' Crown Princess cruise ships. The city does not anticipate an
adverse impact on local tourism from the recent and widely reported
mechanical failure of the Triumph and expects the ship to return to
service in mid-April 2013.

The Pleasure Pier on the city's beachfront leverages the attraction of
the city's shoreline and is expected to draw 3 million visitors
annually. The pier represents a $60 million redevelopment investment by
Landry's Inc. in dining, attractions, retail and parking. The city's
seawall beautification project is expected to draw additional visitors
to the island as well.

The Galveston Island Convention Center (140,000 square feet of meeting
and convention space) is located on the beachfront and is supplemented
by the Moody Garden complex (over 100,000 square feet of combined
meeting space). The city's center reports an increase in
conventions/meetings scheduled for 2013.

Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS Global Insight, National
Association of Realtors.

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